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Broker's take: OCBC, CIMB downgrade Lippo Malls Indonesia Retail Trust on new tax regulations in Indonesia

ANALYSTS at OCBC Investment Research and CGS-CIMB have downgraded their call on Lippo Malls Indonesia Retail Trust (LMIRT).

OCBC downgraded the Reit to "sell" from "hold" with a lower fair value of S$0.31, a 23.5 per cent decrease from the previously assessed fair value of S$0.405. CGS-CIMB downgraded the Reit to "reduce" with a target price of S$0.33, a 23.3 per cent decrease from its previous target of S$0.43.

Both analysts at OCBC and CGS-CIMB cited Indonesia's new tax regulations on income earned from land and building leases, which took effect on Jan 2. Such income is now subject to a 10 per cent tax on the value of the amount collected by tenants, including service charges and utility coverage charges.

The new tax rules, said the brokers, will have a negative impact on LMIRT unit's distribution per unit (DPU).

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According to calculations by the Reit's manager, had the new regulations been effect exactly a year earlier, distributable income for FY17 would have fallen by S$6.8 million. This would have translated to DPU being 7.2 per cent lower at 3.19 Singapore cents instead of 3.44 Singapore cents.

Both OCBC and CGS-CIMB also said the continued weakening of the rupiah could have a negative effect when LMIRT converts its distributions from rupiah to Singapore dollars.

OCBC analysts said: "We believe the multiple challenges that have come to light will continue to plague the Reit's operations, despite respectable efforts on the part of the management."

CGS-CIMB analysts were, however, positive on LMIRT's long-term growth due to its exposure to the rising urbanisation and growing middle-class consumption in Indonesia despite the erosion of earnings in the short-term due to the effect of higher taxes.

CGS-CIMB said a key downside risk to its rating is the continued rupiah weakness while higher-than-expected rental reversions are upside risks to its evaluation.

LMIRT units were trading S$0.02 or 5.5 per cent lower at S$0.345 at 11.15am.